Tenet Healthcare Stock: Still A Great Healthcare Prospect At This Time (NYSE:THC)

These days, the health care industry represents one of the largest segments of the U.S. economy. Once you understand this, it should be no big leap to extrapolate that a number of large companies might eventually evolve around this market with the sole purpose of providing various goods or services that are value add in nature. One such company is Tenet Healthcare Corporation (NYSE:THC). Having fully recovered from the COVID-19 pandemic, the business now continues its growth. However, the trajectory moving forward will not always be smooth. For investors who buy into rapidly growing enterprises at high multiples, uncertainty from quarter to quarter or from year to year can be painful and risky. But for investors who acquire stock on the cheap, so long as that stock represents a high-quality firm, all that matters is the long-term outlook. Tenet Healthcare represents just such an opportunity.

The picture still looks great

Back in February of this year, I performed an analysis of Tenet Healthcare. In that article, I called the business a sizable player that was trading at a discount to some other hospital and healthcare facility owners and operators. On an absolute basis, I said that shares were definitely cheap and that the company’s path moving forward looked promising. In that article, I ultimately rated the company a ‘buy’ prospect, indicating that I felt it would outperform the broader market moving forward. So far, the business has done just that. While the S&P 500 has dropped by 8.3%, shares of Tenet Healthcare have dropped a more modest 3.5%. It is painful to see any sort of decline. But a drop that is less than half of what the market experienced should be considered a win at this moment.

When I last wrote about Tenet Healthcare, we only had data covering through its 2021 fiscal year. Fast forward to today, and we now have data covering the first quarter of 2022. Although mixed, the broader picture for the enterprise is promising. For instance, revenue did drop year over year, falling from $4.78 billion in the first quarter of 2021 to $4.75 billion the same time this year. During that same time, however, the company’s bottom line improved, with net income rising from $97 million to $139 million. Operating cash flow did fall mightily, plunging from $544 million to $228 million. But if we adjust for changes in working capital, it would have risen from $570 million to $606 million. Over that same window, EBITDA for the business also improved, climbing from $777 million to $888 million.

Outside of the immediate financial data, it’s also worth noting that management has been making some interesting moves aimed at creating value for the company’s investors. In the company’s first-quarter earnings release, for instance, management revealed that they had reduced debt in the then year-to-date period in the amount of $824 million. That move should ultimately save the company $61 million, on a pretax basis, each year moving forward. $700 million of this necessitated a $30 million make-whole premium. But that is a small price to pay for the annualized interest savings moving forward. The company made another interesting move when, just recently, it announced the issuance of $2 billion of senior secured first-lien notes that will come due in 2030. These notes bear an annualized interest rate of 6.125%. The company plans to use most of the proceeds to redeem $1.748 billion worth of debt that comes in the form of senior notes that were initially set to mature in 2023. Those notes bear an annualized interest rate of 6.750%. Though this may not seem like a significant difference, based only on the redemption aspect alone, this will save the company a further $10.9 million in interest each year. However, the extra $252 million the company is keeping will more than offset this, raising interest expense by $15.4 million.

In regards to the 2022 fiscal year, management has mixed expectations for the business. At present, the expectation is for the firm to generate revenue of between $19.50 billion and $19.90 billion. At the midpoint, that would translate to a year-over-year increase of 1.1%. Net income from continuing operations, however, will likely worsen some. Overall, the company should generate profits to common shareholders of between $645 million and $775 million. At the midpoint, this figure comes in at $710 million. That compares to the $823 million reported last year. The company also anticipates EBITDA of between $3.375 billion and $3.575 billion. The midpoint here of $3.475 billion is slightly lower than the $3.483 billion experienced in 2021. We should also pay attention to operating cash flow. This is forecasted to be between $1.30 billion and $1.55 billion. However, if we take the midpoint and subtract from that non-controlling interests, we end up with a reading of $895 million. That would compare favorably to the $815 million, using the same approach, that we get for the 2021 fiscal year.

Although financial performance will likely be mixed this year compared to last, this does nothing to change the fact that shares of the company are quite cheap. using our 2021 figures, I calculated that the company is trading at a price to earnings multiple of 8.5. This number increases slightly to 9.8 if we rely on 2022 estimates. The price to adjusted operating cash flow multiple should be 8.6, a number that should decline to 7.8 if my 2022 estimates are accurate. And finally, the EV to EBITDA multiple of the company should be 6.8, irrespective of whether we use the 2021 results or the 2022 estimates. To put the pricing of the company into perspective, I decided to compare it to five similar firms. On a price-to-earnings basis, these companies ranged from a low of 9.8 to a high of 26.8. And on an EV to EBITDA basis, the range was from 7.1 to 15.7. in both cases, Tenet Healthcare was the cheapest of the group. Using, instead, the price to operating cash flow approach, the ranges from 7.9 to 17.3. In this scenario, three of the five firms were cheaper than our target.

Takeaway

At this moment in time, I understand why some investors may be worried about Tenet Healthcare. This year is not going to be the smoothest for the enterprise. However, it does nothing to change the fact that this year is still going to be rather solid. The company continues to generate significant cash flow and it is trading at levels that should be considered quite cheap. This is true on both an absolute basis and relative to similar firms. Because of all of this, I cannot help but to retain my ‘buy’ rating on the firm right now.